Slugger O'Toole

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Euro crisis: “the EU is setting itself up for failure”

Tue 26 April 2011, 4:06pm

In a lengthy article posted at Crooked Timber, John Quiggin and Henry Farrell argue that

By concentrating on its economic problems but ignoring their political consequences, the EU is setting itself up for failure. The case for austerity does not make sense. And if the EU fails to deal with the political fallout of its own institutional weaknesses, it is going to collapse. No political body can force voters to repeatedly shoulder the costs of adjustment on their own and expect to remain legitimate. During the gold standard, nation-states tried this and failed—and they had considerably more authority than the EU has today. Hard Keynesianism offers a means to combine fiscal discipline with flexibility in order to cushion the political costs of adjustment in times of economic stress. EU leaders must institute it in a hurry.

And while that article focuses on the eurozone crisis, French President Nicolas Sarkosy and Italian PM Silvio Berlusconi have called for reform of the Schengen Treaty – which allows free travel within most of the eurozone.

BBC Europe editor, Gavin Hewitt, makes a pertinent point about reforming “one of the cornerstones of the European project”

The French and Italian leaders are each under pressure. They may agree on a joint appeal to review Schengen, to clarify how the agreement applies to the movement of significant numbers of people. But their interests differ. The Italians want the review to get others to “burden-share” ; the French want to keep the migrants out.

The real tension here is that EU principles are increasingly seen as at odds with economic reality and the wishes of a majority of the people. Appeals to solidarity do not sit well with the voters. The dilemma is similar to that of the bail-outs. In order to keep the euro together Brussels is supporting policies that alienate many voters.  [added emphasis]

As I said previously, the question is, do they still all know what to do?  Even if they can’t get re-elected once they’ve done it?

Or will domestic political pressures, in Ireland and elsewhere, hold sway?

And with what result…?

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Comments (7)

  1. DC (profile) says:

    I’m not too sure about the ‘keynesianism’ approach. I’d rather the banking debt was written off entirely, rather than adding more debt on top off this banking debt.

    It wasn’t the actions of the normal market economy that got these national economies into the mess that they are in today; it was instead the *financial economy* and the oversupply of credit (i.e. debt) by global financial services. Global markets and ‘innovation’ were used to leverage or extend credit out into these national economies – and directly into property in particular.

    The economic boom was built on financial services that created debt mountains by carelessly loaning out a lot of money to others – the public – with repayment knocked well into the future while they – the financiers – took their money in bonuses etc immediately upfront. A pyramid scheme of sorts. In hindsight these loans quite clearly should never have been made because the natural economy just was not there to support the level of repayment demanded by the banks.

    Basically it was a lot of loose credit given out by financial services without thinking it through properly. The banks are to blame.

    The taxpayers are being asked – sorry *forced* through higher taxation – to hand over money to make up for the shortfall between – the *nominal* amount that the banks were able to loan out at peak ‘bubble’ rates – and today’s actual price, the real market price say of properties.

    Taxpayers are being used to protect asset prices of various stocks in various companies as well because governments across the world simply cannot stop capital flight that would happen if banks were allowed to fail.

    According to the Wall Street Journal, the wealthiest people in the world i.e. those with over £1 million in investable assets, are hoarding over $10 trillion since the 2008 financial crisis. That reluctance is likely to change soon.

    Based on the above you can see the wealthiest don’t want to take a hit personally, so governments step in collectively courtesy of the taxpayer.

    So at least one thing is alive and well in both Britain and the EU – the constitutional protection of capitalism, this financial absolutism has seen off democracy and seems to take precedence over everything else. For instance, why should taxpayers be forced to payback nominal fees belonging to banks whenever today the real price of property has been exposed? Do taxpayers just pay back this debt belonging to others simply because capitalism says so?

    Once again it looks like the primacy of economics and with that the the death of democracy.

    Is there much point in voting anyway sure don’t lobbying firms and those corporate interests win out over the little guy’s vote in the polling booth?

    What do you think?
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  2. Greenflag (profile) says:

    DC ,

    Is there much point in voting anyway sure don’t lobbying firms and those corporate interests win out over the little guy’s vote in the polling booth?

    It’s worse than that and not getting any better . In the USA many employers feel empower to tell their workers who to vote for . Here’s just one example in the link below.

    As you say it’s goodbye ‘democracy’ and welcome to the brave new world of financial and corporate sector oligarchy .

    ‘The banks are to blame’

    Not solely . The elected politicians going back two decades or more who deregulated the financial institutions opened ‘pandoras’ box to the excess and avarice of the banksters.

    http://www.democracynow.org/2011/4/21/thought_control_right_wing_koch_brothers

    Good post DC . I believe there will be a default by some of the EU countries badly affected such as Ireland. Greece and Portugal . To the extent that our elected politicians could have prevented or much ameliorated this mess these countries will have to repay at least some of the debt. And while one can have sympathy for the German and French taxpayers as fellow europeans that sympathy does not extend to their reckless banks who lent ‘irresponsibly’ and by devious financial devices .

    What do you think?
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  3. DC (profile) says:

    The American political establishment like to say that lobbyists buy organisations the time and ear of the president – and for that matter prime minister / taoiseach – but not influence. That’s bull, it buys influence for sure.

    At the time of the crash all the big financial institutions were ringing up Gordon Brown pestering him full on for bailouts left right and centre.

    He of course caved in but what was to stop a full on protection of domestic deposits only plus a temporary taxpayer-funded arrangement to pay these staff in these banks to work on – keep things running – and to transfer domestic deposits out into a new publicly run bank, starting up from scratch.

    Then by all means, lift tax from the populace but put it into a new bank which wasn’t involved in reckless speculation in proprerty and whatevers else. The likes of Northern Rock sold 115% mortgages, crazy.

    Because allowing these banks to fail would have meant that the associated shares would also have been written off too – and we all know that these financiers held/hold a lot of shares in banks etc, now they have been protected courtesy of the taxpayer, whenever they should have been left to their own devices.

    Same approach applies to the EU, using the taxpayer as the apparent debtor and called on to do the supply-side recapitalisation of national banks and economies, rather than asking or in fact forcing the creditors to suck up the losses on loans that should never have been issued.

    In terms of the wars in Libya and across north Africa / middle east – has anyone seen Cathy Ashton the foreign affairs representative of the EU, what has she been doing to earn her £330,000 pa job?

    And in terms of Schengen – since when did Tunisians turn into EU nationals deserving of free movement?

    The EU is in a mess in a number of different ways – lack of organisation being the main one, second is agreeing on the tactics to be used to get out of these problems and on identifying some sort of grand strategy.

    Merkel did say the bond holders would take a hit, but what will come first – probably a default?

    Also both silver and gold prices are up, silver hitting close to $50 per ounce earlier in the month. That’s a tell tale sign that the currencies – the dollar and euro are not to be trusted.

    What do you think?
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  4. Greenflag (profile) says:

    DC,

    ‘Because allowing these banks to fail would have meant that the associated shares would also have been written off too – and we all know that these financiers held/hold a lot of shares in banks etc, now they have been protected courtesy of the taxpayer, when they should have been left to their own devices.’

    Given the interlinked nature of world banking particularly since the general deregulation and freedom of capital transfers ( paper money -real or leveraged or values based on derivatives) over the past decade and more -add to that the tax haven advantages held by the largest corporations and the banks and throw into the mix sychophant paid for politicians of all the major parties and the witches brew needs hardly any explaining as to why it’s bubbling over -not just in Ireland but around the entire world .

    By 2008 such was the concentration of capital and power in the hands of the major USA and UK banks that they could effectively dictate to both Bush and later Obama what they wanted to happen . Neither could face the prospect of every ATM and bank in the USA shutting it’s doors . What was at stake was societal collapse which would have had knock on effects all around the world and would have taken a generation or more to recover from assuming ‘anarchic capitalism’ survived .

    What has happened in Ireland and Iceland and the UK is just a subset of what was permitted to happen in the USA .

    ‘The EU is in a mess in a number of different ways – lack of organisation being the main one, second is agreeing on the tactics to be used to get out of these problems ‘

    Because the EU is ‘dominated’ by Germany and France at least in private banking terms the continued survival of their banks is what’s at stake for Merkel and Sarkoczy. Their taxpayers were aghast at bailing out Greek,Portuguese and Irish banks -so how much more aghast will they be if it comes to bailing out German and French banks?

    For ‘bondholders’ taking a hit effectively means German and French banks taking a hit and also British and Dutch . The leaders of all these countries are politically vulnerable to any major austerity moves as we have already seen from the UK. It does not take a whole lot for the French to head for the barricades and we should all know from our history books that making an economic wasteland of Germany has consequences world wide given it’s importance in the world economy.

    What do you think?
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  5. DC (profile) says:

    For ‘bondholders’ taking a hit effectively means German and French banks taking a hit and also British and Dutch.

    Forcing haircuts could provoke another liquidity crisis because banks no longer get rapaid the amount which they thought would be repaid to them and therefore balance sheets go into the red again.

    But one thing doesn’t change and that’s the manner and method by which the government raises money.

    It is still possible to create a new bank of sorts and pump this new money into good, rather than accept the level of debts associated with old banks that are insolvent and should be allowed to fail but are protected – thanks to the taxpayers footing the bill.

    Maybe there is just too much instability and risk with this option in that bond rates will skyrocket if governments don’t play ball with the market, who knows?

    What do you think?
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  6. Greenflag (profile) says:

    DC ,

    ‘bond rates will skyrocket if governments don’t play ball with the market’

    A certain Mr Heller of the USA referred to this predicament as Catch 22 . It does not seem a firm foundation for a world economy of some 7 billion people -given that ‘investment ‘ derivatives alone worldwide totalled some 60 trillion dollars or 5 times USA annual GDP ,

    ‘Who knows ‘

    Greece, Portugal, Iceland , Ireland , and the USA for a start along with a host of other countries .

    On a lighter note we have

    http://www.rte.ie/news/2011/0427/reglingk.html

    Herr Klaus Regling tells us that nobody in Ireland or in Europe shouted stop -full article above .

    This would appear to be confirmation as if we in Ireland were not already aware that our government and opposition politicians in the 2002 to 2008 period were up to their oxters in denial of the economic realities . Regling’s reference to Europe seems to indicate that there was very little if any restraint also placed on the similar overweening greed of the Eurosytem banks also in Germany, France .

    While Regling’s promise of future ‘reform ‘ is just another case of trying to close the door after the horse has bolted EU monetary and banking regulatory reform will not work unless there is across the board G-20 reform , And that as of now and since 2008 seems as far away as ever .

    So to your question of ‘Who knows’. the answer appears to be no one and the world’s leading international and banking authorities have been in seat of the pants flying mode since 2008 – or should I say in ‘octopus ‘ mode with all tentacles wriggling furiously but as of now no visible sense of purposeful direction or indeed sight of any destination other than continuing world monetary instability.

    What do you think?
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  7. Greenflag (profile) says:

    addendum,

    Herr Regling is certainly in no doubt as to the ‘national governmental skills level’ of certain Eurozone ‘countries when he said

    ‘A new European Systemic Risk Board will be able to pick up problems as they emerge in the future, and tell national regulators to deal with them.’

    Herr Regling does not say what is to happen if the eh ‘national regulators’ or their ‘governments’ do not do as they are told by the eh ‘bureaucrats ‘ and said unelected ‘experts’?

    But I’m sure Herr Regling means well . Alas the Irish taxpayers and people and their economy -impaled on a financial crucifix having been nailed to it by their own bat blind government and averting eyes ‘regulatory’ experts assisted by the ECB and IMF and by the Irish and EU banksters may not be in any mood to listen to Herr Regling’s wise after the event words :(!

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